通用動力 (GD) 2004 Q1 法說會逐字稿

Good day and welcome to General Dynamics' first-quarter 2004 financial results conference call.

Today's call is being recorded.

For opening remarks and introductions, I'd like to turn the call over to Mr. Ray Lewis.

Thank you very much, Rochelle.

I'd like to welcome members of the investment community who are on the call as well as members of the press who are listening in today.

As usual, we are likely to make some forward-looking statements in the course of this conversation today.

Please realize that these are based on our expectations and estimates; they are not guarantees of future performance and they are subject to the normal risks of business and uncertainties of business.

I would direct you to our most recent 10-K for a more thorough explanation of what those risks might be.

With that said, I'd like to turn it over to our Chief Executive Officer, Nick Chabraja.

Good morning.

I think I can keep my comments quite brief this morning to enable more time for discussion.

As our press release reveals and as the attached materials illuminate, we had a powerful first quarter that gives us a magnificent and start on the year.

My brief remarks are going to just focus on a couple of areas, and what I'm really going to do is just talk to you about how I'm reacting to these numbers because they obviously have exceeded the sell-side's expectation and frankly, they exceeded our operating plan by a fair margin.

But as far as our earnings are concerned, I want to focus on earnings rates, or margin rates, in each of the segments.

They obviously continue to get better, and they did so while Information Systems and Technology and Combat Systems were integrating sizable acquisitions, and in IS&T, we were consolidating two of our existing businesses.

In IS&T, the margins improved over the fourth quarter by 70 basis points, which indicates to me that the integration of Veridian and the consolidation of C4 and Decision Systems are going very well.

As I reviewed those results and talked with a group executive and some of the operating presidents, I would expect this margin rate to be able to improve somewhat as we progress through the year.

I find that very gratifying; the business is doing very well.

Combat Systems sustained the performance, the very good performance they had in the fourth quarter with a 10.5 percent margin rate, which in my view indicates that the consolidation and integration of the GM Defense business is going very well indeed.

There was no slippage, and I really don't have anything forward-looking to say about that group.

Maybe the biggest surprise, I think, and evidence of very hard work on behalf of our operating unit presidents and our new Group Executive, Mike Toner, was the Marine Systems' performance.

They came in at 7.7 percent margin, which is better than we anticipated.

I think we'd indicated to the investment community, we were looking for something -- an improvement over last year, but something in the 6.9 to 7 percent area.

They came in at 7.7 and some increased volume largely in the repair area.

So, that was a very good performance.

We will fight to hold that performance through the year.

There will be some issues with sustaining 7.7 through the year, but it's pretty clear to me right now that, absent something I can't foresee, we will certainly beat our plan as far as the margin rate in Marine Systems.

So, I'm very pleased and proud of the effort that has gone on there.

Gulfstream continues apace.

They're two good quarters in a row now, margin rates up almost 100 basis points -- I guess about 90 basis points over the fourth quarter.

That's as a result of the cost reductions we've told you about.

It's the absence of losses on pre-owned aircraft inventories and some price firming on new aircraft, which reflects itself in our manufacturing margins.

I would think that Gulfstream should also gradually improve both its earnings and margin rate through the remainder of this year.

With regard to the outlook for the business jet market, I remain guardedly optimistic.

Prices are firming in our experience for both new and pre-owned and available pre-owned inventory, at least ours, continues to decline markedly.

We had nine pre-owned aircraft in inventory at the end of the quarter; three of those are subsequently under contract and the other six are on interim lease to customers, so we frankly have no pre-owned inventory for sale.

I look forward to getting some in the remainder of the year in connection with transactions.

So, all the way around, really solid performance by our operating units, no material anomalies of any kind in that performance.

Really, what you see is what you get -- pretty straightforward here.

Cash -- I guess no remarks by me would be complete if I didn't mention cash.

I am particularly pleased with what happened in the cash area.

Given that we had such a strong fourth quarter in cash and we've historically had a light first quarter in cash -- in fact, it's not been uncommon in our history to be cash users in the first quarter -- well, here we had cash, free cash flow from operations after CapEx in excess of net income, which I think is a particularly impressive performance.

So, in summary, I'm obviously very pleased with these results.

It represents a strong start to the year.

Our defense businesses are getting on very solid footing, and I expect them to continue to perform well.

Gulfstream's results continue to improve; we've had two good quarters.

Our backlog leaves us without material risk to the plan for this year, and we are starting to fill out rather nicely for the first half of next year as well.

So, we will continue to focus on performance, pay attention to our fundamentals, and look for flawless execution from our operating groups.

With that, I will let Mike give you a little more color on some of the variances.

Thanks, Nick.

Good morning, ladies and gentlemen.

I, too, will be very brief.

It is a good quarter and there isn't a lot to be said that wasn't covered in the press release, its attached schedules and Nick's comments.

I will comment, however, on a couple of the larger variances from last year.

For those of you that have the press release in front of you, I would refer you to Exhibit A, the consolidated statement of earnings.

If you go down the columns, you will note that interest expense this year is $39 million, negative of course, versus $11 million last year, or a $28 million change.

This is the result of the higher debt balance we have now as a result of the $3 billion in acquisitions we've made last year.

If you go down to the tax line, you can see that taxes this year are $44 million higher than last year.

Besides more income this year, the rate is 33.3 if you've done the calculations, versus 28.9 last year.

Last year, netted in the $90 million tax provision was a $15 million favorable adjustment.

Excluding that adjustment, the rate would have been 33.8.

We believe our run-rate for this year will be about 33.3.

If you'll turn to Exhibit B, operating earnings and our resources segment is a negative $9 million versus earnings of $10 million last year.

As most of you know, resources is a seasonal business and typically the first quarter is negative because of weather.

Last year, however, we had a favorable FAS 143 adjustment to our reclamation liability accrual, which generated income.

So with that said, I'll turn it quickly back to Ray to get started with the Q&A process.

Thank you, Mike.

Rochelle, if you would, would you explain to folks how they can get into the queue to ask questions?

The question-and-answer session will be conducted electronically. (OPERATOR INSTRUCTIONS).

Cai von Rumohr with S.G. Cowen.

Excellent quarter.

Could you give us some color on what the sales of pre-owned aircraft were in the quarter?

I think we sold only three aircraft.

Mike, do you have the volume on that to enable you to backout pre-owned to do a --?

We sold three.

It was roughly 25 million in sales, Cai.

Okay, great.

Could you give some color, Nick, on how much of the backlog of this year is sold out?

Any color on what is sold for next year?

Cai, I don't have, nor have I computed a specific percentage, but I think the five -- it would be hard to get a 550 slot or a 500 slot this year.

There may be one or two that are currently under LOIs that, if those didn't close, could be available.

We have some delivery slots in the fourth quarter on the new 450 product.

We are in pretty good shape in both the first and second quarters next year.

Okay.

Your sales were just monumental in both Marine and in IS&T.

Beyond the repair, why they were quite so strong, and what should we do with our full-year sales estimates?

Let's talk first about IS&T.

I think, Cai, it's no one silver bullet here; it was a sprinkling.

What we saw in the quarter, really for the first time, is the power of this large IDIQ backlog, which is different than our funded and total backlog.

We set it aside separately for you.

If you look at those numbers, you'll see a little draw-down on those IDIQ contracts.

Well, that fueled volume in the quarter that was difficult for us to predict and plan for because we don't know when the customer will access us through those contract vehicles and it happened with considerable frequency in the first quarter.

On the Marine side, I'd say we're up over the third and fourth quarters of last year by something over $100 million.

The major driver there -- and I'm going to look over at Mike Mancuso to see if I'm 100 percent correct -- was repair work.

We did a larger volume of repair, both at Electric Boat and at Masco than we had anticipated.

Mike, is there any of the volume that jumps in your mind?

I think we're seeing Electric Boat, Nick, a little more Virginia class volume than we had a year ago, and we're starting to see some of the volume show up on the conversion of the Trident -- (multiple speakers) -- GM program to cruise missile-carrying submarines -- so Virginia class and Trident activity, if you will, in Electric Boat.

I think the surprise for me was the repair volume, because the Trident volume and Virginia volume was kind of in our plan.

There you have it, Cai.

I don't quite know how to speculate for the year on volume.

We had told you all that we would exceed 19 billion for the year; we are certainly on track to do that.

If we did no more than have four equal quarters, we would do that.

It doesn't seem to me that that's a likely scenario.

It should build through the year, but I really don't want to speculate about that right now.

I don't have as good a handle on it as I might.

Safe to say, it's going to be between 19 and 20 billion.

Steve Binder with Bear Stearns.

I echo those compliments on the quarter.

Nick, can you maybe just touch on the margins or, Mike, on the margins in Marine Systems?

You talked about the pleasant surprise.

It looks like, if you back out the charge in the fourth quarter on the tanker program, that it looks like there is about a 100 basis points improvement in the margin.

You mentioned higher repair volume.

I'm just wondering, are there any accrual adjustments in the portfolio in the quarter or is it really more favorable mix and higher volume?

I think we might have got a minor accrual adjustment on the last Seawolf.

It certainly didn't drive the boat.

I think we got some good margins on repair volume and I think just a little bit better performance all the way around -- a little bit here, a little bit there.

Second, with respect to cash flow, last year --.

Cash flow actually did a little better than what you've done to get -- your result was just to offset the loss.

They actually reported a profit in the quarter, so that helped.

Secondly, last year's first quarter, I think you had some advances that aided cash performance.

This year, like you talked about, you beat your net income.

I was just wondering, were there any advances in the quarter?

What was in the working capital that provided that surprise relative to the history of the Company?

Typically, because of our strong fourth quarter, Steve, we are able to pull in a lot of payments into the fourth quarter, which kind of drained the swamp, if you will, for the first quarter.

We didn't have that to the same degree this year.

I think, overall, working capital in the quarter probably improved by $50 million-plus (indiscernible) and some of that is timing of advances but not substantive.

I also, Steve, noticed that the cash performance was fairly even across the unit.

We didn't have anybody do anything unusual there.

Just a couple of last things -- over at Gulfstream, can you maybe talk a little bit -- you mentioned you are in good shape in the first half as far as delivery positions, as far as the skyline goes in '05.

Would you kind of characterize what percent of your firm -- of your whole production is stable in '05, what kind of percentage are you firmed up right now (sic)?

I don't know, Steve.

I'm just eyeballing a bunch of charts without percentage.

It looks like 40, 45 percent complete.

Lastly, Spectrum Astro -- you know, Nick, you've historically been reluctant to make acquisitions in the space area, may have a number of spacecraft -- there are not a number of spacecraft programs.

Can you maybe talk about that acquisition?

Do you feel like you're interested in expanding your scope in space or is it more just because of a general fit with IS&T?

Steve, it's really the latter.

Remember, we are in space.

We are a provider, through our Scottsdale operation, where we have a relatively significant business providing payloads to providers.

I've always been reluctant to be in the launch end of the business, and Spectrum Astro's business fits hand-in-glove with what we have at Scottsdale.

They have an additional matter there; they are a niche provider of satellites themselves, but that's not why we bought them.

We bought them for the dead-on fit of the systems with our group right there in Scottsdale, and it happened to be handsome that they don't give us a geographical problem.

It's something we can deal with quite nicely from our base in Scottsdale.

Nick Fothergill with Banc of America Securities.

Very nice quarter.

Nick, a quick question on strategy in Europe, where you've mainly consolidated the European armored vehicle business with the exception of the Germans.

Can you give us a bit of an insight into your strategic thinking behind this?

I know you have seen some good growth coming out of potential Eastern European buys.

I think, Nick, you've pretty well captured it.

We've been in the business as a result of our acquisition of MOAG, which came with General Motors Defense, and we've had a long-standing relationship with Styer (ph) and have now acquired the rest of that business.

They've been our partners and friends for a long time.

You know the story of Santa Barbara's (indiscernible), so it seemed like a natural extension to look to Alvus, where we know that the government of the United Kingdom is formulating a requirement for its next-generation family of combat vehicles, a program that they've called FRES, Future Rapid Effect System.

We are particularly impressed with the Scandinavian piece of Alvus.

The old Heightlands (ph) business?

Yes.

It's a good business and they are doing well, and so all it seems to make considerable sense to me.

There is growth in the Eastern European market, and it's, I think, an opportunity to appeal to that market with good products, a variety -- a broad variety of products, particularly when the export product out of Germany is always -- is troublesome as a result of political considerations within that country.

So, it's a good opportunity for us and we look forward to it.

Nick, as you look over to what's going on in the Middle East at the moment and IS&T and Combat Systems both face that area pretty well -- are you identifying any further rumblings in the army from Schumacher's desire to bring some of the electronic systems that you've got in Stryker out of SCS into the current vehicle fleet?

Well, look, Nick, I think that the best guidance I can give you there is to listen to the army.

I don't want to get ahead of the chief, or particularly close to things that are coming out of the combat.

What's going in or what's coming out is so much of what we do is classified; it becomes (indiscernible) to talk about it.

So, I think watch the army.

The guidance there is pretty clear.

Yes, it seems to be and also, some nice, big opportunities for IS&T on the radar with 135 U.S.

Air Force bases due to award quite a big telecommunications contract, I believe, in September, where you seem to be up amongst the front-runners there, so that looks good as well.

We are very interested in that competition to say the least, speaking of the NetSense (ph) program, I think.

That's right.

Nick, another one is you've been talking a little bit, I think, in your travels about being prepared to add another leg to the business.

Now, is this a fifth leg or would this be a leg that, if you came across it, it would be of a related business to what you already have but just in a slightly different market?

I really don't know, Nick.

As I've indicated, we are focused a little differently this year and I think you can see the result of that focus.

I have spent an awful lot of my time and asked my key executives, CFO on down, to get awful involved with operations, provide all of the assist we can to the Group executives and focus ourselves on driving margin.

I think we're doing that.

We had some challenges, and we still do, in integrating some of these acquisitions that we made last year.

I'm pleased with the way that's coming but I'm spending a little less time right now worrying myself about the fifth leg of the stool.

We will get there, however; it's just not on the frontal lobe right now.

I got it.

One real quick one on the Gulfstream -- with mix in the last quarter, I think you identified that Financial Services had sort of jumped from 2 percent of the mix to a kind of 6 or 7 percent.

Is that still an ongoing trend?

Is a lot of this being driven by investment banking?

No, I don't have anything for you, Nick, on customer base here.

Give us an opportunity to review this a little further.

I don't think much has changed since the last time I spoke on this subject.

So those levels of interest are picking up across the board -- (multiple speakers)?

Across the board, yes.

In fact the prospect list is quite vigorous compared to this time a year ago.

There are more people sort of at the bottom end of the funnel.

The bottom end of the funnel would be that stage where we are making firm proposals, pricing proposals to customers, entering into Letters of Intent or negotiating firm contracts.

So, we have an active market right at the moment.

Sam Pearlstein with Jefferies & Co.

Good morning.

Actually, just following up on that Gulfstream prospect list, do you have any sense as to what extent you've seen people trying to pull deliveries into '04 from the accelerated depreciation, what that might mean for '05 demand?

I mean, at this point, are you more or less sold out into '05 than you typically are in April?

It's not a problem for us.

Whatever pulling-forward people have been doing is done.

There are a couple of slots left if somebody is anxious about that.

Sam, one of the things that might be indicative is we have a considerable number of 450s sold for first and second-quarter delivery, people who could just as well have asked for fourth-quarter delivery and they are not.

Within I guess the expectations for the higher earnings, have you made any assumptions with regard to Alvus or Spectrum Astro or just the acquisitions in that guidance?

Sam, last time I looked, I don't own them and I don't make any assumptions about stuff that isn't in the barn.

If we acquire those entities and they close and they change the needle, we will further our guidance, but at the moment, that is highly speculative.

What I've really done, in terms of this guidance, is just plug the obvious -- take in the 19 cents that we beat our own expectations by and called it 20 and added it to my guidance.

Okay.

You might view that as cautious, and it probably is.

Okay.

Then, can you give us any update with regards to the Bath union contract, and has anything changed with respect to that?

We have entered into a contract with the first of two labor unions at Bath, and the second, the larger, is commencing soon.

We will report to you when that is finalized.

We are optimistic going into these discussions.

The first group went well, very professional discussions with labor relations on both sides.

Okay.

Then last question, in terms of the strong cash flow, did you buy back any stock in the quarter?

No.

David Strauss with UBS Financial.

Good morning, nice results.

Can you talk about margins, give a little bit more color on margins at Combat Systems?

After you acquired GM Defense in the first quarter of last year, you kind of -- you did higher than 11 percent in the second and third quarter and now, we are kind of -- the last two quarters have been at 10.5.

What do you see looking forward for the rest of this year?

I think we are at 10.5 two quarters in a row.

I think we've got some opportunity here to boost it a little bit but performing pretty well.

At Gulfstream, if you look at the first quarter, your -- (technical difficulty) -- delivery mix is pretty strong; you did 66 million in operating profits -- (technical difficulty) -- aircraft losses.

If you just extent that out for the full year, you're kind of in the 260, 265 range.

For operating profit, your guidance is higher than 300 million.

How do we get to that?

How do we get to that higher level?

Is it -- do you think the mix is actually going to strengthen from here for the rest of the year?

No, as I indicated to you, watch our earnings and rate grow through the year, and volume, too.

I mean, this volume wasn't strong.

Your large aircraft delivery forecast is still at 55?

Is that when you're working around?

Yes, I think so -- 53 to 55.

I think we delivered 13, did we?

Green?

So you're going to get a volume pickup.

You're also going to get a margin increase as we work through the year.

George Shapiro with Smith Barney.

Good morning.

Nick, in the IDIQ areas, if I just look at the drop in the contract value that you mentioned from fourth quarter with 6.5 billion to around 5.9, if I deduce that $600 million of IDIQ went into revenues for IS&T in the quarter -- is that the right way to look at that?

I don't know, George, because you get both puts and takes, so I can't give you a crisp answer, but you are not terribly far off.

Nick, the IDIQ business is probably mostly hardware.

Would that carry a little higher-than-average margin, relative to the overall sector?

No, the IDIQ business is both hardware and service. (multiple speakers) -- you heard one of the analysts earlier;

I think it was Nick Fothergill mentioned this NetSense (ph) contract, a large Air Force contract that's being computed.

It is an IDIQ form of contract and it is a mixture of service and hardware, but largely pass-through on the hardware, so it's basically a service contract.

So, many of these are service as well.

I don't think you're getting a mix distortion out of IDIQ; it pretty well mirrors our business.

Okay, I'm just trying to get to the point you I have talked about that you make so much higher margins in this business than other people in the business.

I know part of it is the hardware content, so that's where I was coming from.

George, it has been true that, of our IS&T businesses, the C4 business, that is Scottsdale and Taunton, have had the stronger margins over time and they are the ones that do the most manufacturing.

They have more product.

Okay.

Then, if I switch to a question on Gulfstream, Nick, if the revenues of Gulfstream stay -- you know, deliveries relatively flat, 55 give or take a little for the next several years, how high do you think you can get that margin without any real help from volume?

George, that's a function of both our continuing cost-containment activity and price.

You will see us continue to come down the learning curve as we product-improve and improve the way we approach both completions and the final assembly and test.

I believe that prices are firming and will continue to firm.

That is in part attributable not only to an improved economy but it is attributable to the fact that the OEMs aren't making as many airplanes right now, so you don't have a supply that exceeds the demand.

I think, if we at Gulfstream continue to be careful about our production rate, prices, in fact, will firm.

We could sell more airplanes this year, George, if we were willing to do so at lower prices.

It's just not something we're going to do.

You have kind of a goal in your mind as to where these margins might be able to go that you would be willing to share?

Not particularly.

I mean, I think they are going to go where they are going to go.

I've always been a great believer that we earned it kind of on the battlefield.

It shouldn't come from the lips of the Chairman.

Okay.

One last one, back on IS&T, it looks like, Nick, that you had to have organic growth again, you know, something north of 20 percent in the quarter.

How long do you think that kind of growth can continue?

We had some powerful internal growth, George, in addition to the volume came from acquisitions.

It's a little hard for us to tell exactly what that percentage was because of the action we took to integrate those businesses, almost immediate action.

But surely you have got to figure it has to look that it was at least 20 percent no matter how you want to try and slice it?

Well, you cut it the way you like to cut it; it was impressive, I'm sure.

It is an interesting market right now, and it is a market that is experiencing rapid growth.

I think that our growth rate is more rapid than the market itself, which means that we are picking up share.

How long that will continue is something that I don't know and don't care to speculate about, particularly.

There is still plenty of opportunity out there, George, and we are currently bidding on a number of significant contracts.

By the end of the year, we will be able to answer your question with a degree of certitude.

The repair business in the Marine area -- I assume that was just due to the conflict that's going on and the use of the ships.

Is there any way of forecasting how that's going to shape out for the rest of the year?

I don't know that it was conflict-driven.

Sometimes, when you're in a conflict, George, in fact, repair work dries up because the ships are deployed instead of in port for service.

I think this was -- the fact that we just got some opportunities that we hadn't anticipated in the quarter, because ships were, in fact, in port and we were given the opportunity to work on them.

So, I don't think you could attribute this to the conflict.

Heidi Wood with Morgan Stanley.

Good morning.

Nick, can you help me out a little on Gulfstream?

You had a 2 percent year-to-year increase in sales despite two more large aircraft deliveries.

So, is the 12 million year-over-year increase two more large aircraft minus one (indiscernible) and yet you talk about improved pricing, so -- but the math would seem that either the pricing was weaker this year versus last year, or did you have spares and support dip below what you did in the first quarter of '03?

No, spares and the service business was good; our margins were improved modestly; manufacturing margins were up.

I don't know how you're doing your calculation, Heidi, but (indiscernible) is moving out strongly.

Nick, conceptually, if you use an average selling price of 40 million for the large aircraft and you did 25 million in used, then that would be a 55 million year-over-year increase -- or even if I use a 32 million (indiscernible).

I don't know what you're using, Heidi.

I'm not going to sit here and calculate with you.

All I can tell you is that manufacturing margins are up; they've been up two quarters in a row, and that really isn't the result of our cost-containment activity; it is the result of getting a little better pricing.

In fact, in the quarter, we actually returned to the new aircraft manufacturing margin we had in the first quarter a year ago, which as you remember was a pretty decent quarter.

We sort of got into trouble a little later in the year.

Can you break out for us what the Green and completion deliveries were by plane type?

I think we gave it to you as detailed as we're going to give it in the press release.

Nick, getting to Marine, it looks like there may be a transition issue for Bath between the DDG51 and DDX.

What do you make of the chances that Congress might add some advanced procurement funding to FY '05 to support the procurement of one or two additional DDG51s in FY '06?

I think talking about it seriously.

I want you to understand this.

If this happens, it's a FY '06 budget issue.

It's a ship that we wouldn't start, I think, until '07, '08.

The principle problem here, despite what you see in the press, is a man-hour issue; it is the ability to keep our folks employed up there.

It's not a financial issue that's driving us; it's the ability to keep the team together so we don't get into this situation where we're going to send 1,500 employees home only to go scouring all over New England a year later or two years later to bring them back.

So, this is dramatized in the press.

It's not a financial issue, one that imperils Bath.

It is a workforce issue and a critical skills issue.

Okay, but I mean, if costs and affordability considerations limit procurement DDX to 1 or 1.5 ships a year, what then would be in implications for Bath?

Ultimately volumes go down but remember, DDX is a much more expensive ship than a DDG, so in terms of dollars, you have to do your own math but volumes may well be similar.

Okay.

Nick, I want to turn a question around on you a little bit because you've always been -- or long been a premier consolidator over the years.

What are the odds that, over the next couple of years, we could see any divestiture activity coming out of GD?

We have been divesting things right along and will continue.

They've been at the margin.

We do portfolio shaping with great regularity and will continue to do so, but it is not core.

Okay.

I will let somebody else ask questions.

Thanks a lot.

Jim Higgins with CS First Boston.

Again, on Gulfstream, do you have any sense, as you look into your sales in the first half of next year, how that compares to the past several years, looking at it from the current time?

In other words, sort of what is your build rate looking for next year relative to where you've been over the past several years?

Look, I'm not even going to speculate about that right now because we haven't said it, but I think if I had to report to you what the forward-looking operating plans are, it would be for a very modest increase in build rate.

I'm really referring to the comment you had made about the sales you've had next year and just trying to get a sense but I'll talk about that off-line.

Look, it's a question of what is we have sold as against what we expect to build.

I'll take it off-line.

(multiple speakers) -- we don't see anything in this market that would drive us to want to increase our build rate by 20 percent or something like that.

This is just going to go up incrementally.

Okay, that's good.

On Veridian, can you give any color on the kind of increased selling opportunities you're seeing from the newly combined company?

It's looking pretty good.

We are bidding some things that we might otherwise not have bid.

The power of the two put together are AIS and Veridian is significant (sic).

We have created and achieved critical mass in some areas, so the selling synergy has been very good.

More importantly, they are capturing some of the cost synergy that we anticipated and that is really what you see in those improved margins.

Right.

Do you think there was anything in the first quarter that was a direct result of the combination of the two companies?

That's a little hard for me to tell.

(OPERATOR INSTRUCTIONS).

Byron Callan with Merrill Lynch.

Good morning, gentlemen.

Nice quarter.

Nick or Mike, I don't know which is better to answer this but how are you guys handling raw materials cost increases?

Do you have pretty much things like steel under long-term contract?

Is this just a pass-through to your customer?

If it is a pass-through, is that a factor in some of the sales growth we've seen?

Let me answer the last one first. the answer is no.

On the pass-through issue, it's not the volume.

We obviously protect ourselves in shipbuilding, which is one of the major uses, by having long-term agreements.

Our suppliers, nevertheless, put us under pressure, despite the agreements, for surcharges, and in some instances, we have pass-through ability under force majeure clauses to the end-user of the product.

In other instances, we have to stare them down and wait for a solution to that.

But the principle material issues that we have seen have been associated with steel, although more recently, I've had some kind of unverified reports from some of my people that there is a softening of the pressure, at least on some of the steel pricing and other opportunities are revealing themselves out of the country, people jumping into the fray.

So, so far, it hasn't been a significant problem for us but it is one of the reasons, Byron, that while I am elated with Marine margins in the quarter, that I'm keeping my powder dry on that.

If they have to pay a little more for steel and don't sign the pass-through, then we will slip a little bit, but I don't expect it to be major.

Okay.

Then just, Nick, again on Marine, was the margin improvement concentrated in any one particular location?

Are there two or three things that kind of stand out that came better than planned, either from a geographic perspective, specific performance or incentive that may have been earned as a result of improved performance, or a specific type of cost that may have been taken out?

No, I think that Bath was pretty much on plan.

They beat their plan by a small mount.

They were just a touch better than they were last year; it didn't amount to anything.

Masco was obviously better, better than we thought.

We had them kind of at breakeven and they made money in the quarter.

And Electric Boat did a little bit better than planned, so a little bit here, a little bit there.

Okay, great.

The last thing, just quickly, some of the upcoming competitions -- it is a pretty full plate.

I think Nick mentioned the Air Force program earlier, but you've got the tall combat ship coming up shortly, arial (ph) common sensor.

Any thoughts on how those are progressing and maybe anything else that's bigger than a breadbox?

I have all sorts of thoughts;

I never share any of them!

We will hear about that when we win them or lose them.

Okay, it can't hurt though, right?

Right, fair question.

Lloyd Zietman (ph) with Bernstein Investment Research.

Let's see, you've answered my Marine question, so I was just wondering, any comments on Stryker's performance in the Middle East?

The Army has indicated to us they are very pleased with the performance, not only of the Stryker vehicle but of their brigade combat teams, which is the really important part about it.

We are pleased that they are using our vehicle.

It has performed well.

Most importantly for us, the slat armor that was designed and put on it has been successful in protecting the vehicle against RPGs, which was a great worry because that appears to be the weapon of choice of the insurgent.

So, the vehicle is performing very, very well in combat and the program is doing well.

As far as the tax rate, the 33.3 percent rate for the remainder of the year, should we be using that going out into '05 as well?

I don't know.

You're on your own in '05, but it's certainly good for this year.

Eric Hugel with Stephens, Inc.

Good morning, guys.

Great quarter.

Can you give us an update?

Are things still status quo with the BP (ph) tanker program?

Yes, Eric.

It's where it was.

We took our medicine in the third and fourth quarters, and our estimate at complete is holding.

We obviously didn't take a charge in the quarter and we will probably deliver two of those ships this year, so we are on our way.

With regards to the repair stuff that you are working on in Marine, is that stuff that was done and completed in Q1 or is there stuff that is going to continue to work through Q2 and going forward?

I think a lot of the volume is under contract and I think it will continue to some degree, so you should look forward to the Marine group having slightly higher volumes than we might have anticipated.

My final question is, you noted that you and your top management team are spending a lot of time with regards to the GM Defense and the Veridian integrations.

What sort of time period would you expect that you're going to be occupied in doing that?

How long is this integration process expected to take?

You sort of misunderstood me.

I told you that my entire management team was focusing on operations, not just the integration.

We spend an awful lot of time at Gulfstream, we work on Marine Systems, both of which do not have integration or consolidation issues.

But, look, I think that it takes a fair amount of time to express confidence that your work is done when you've put together two businesses, both rather large.

I'll feel increasingly comfortable quarter-by-quarter.

We are going to continue to focus on this because its bearing fruit.

Thanks a lot.

Rochelle, we can take just one more question before we have to wrap up.

Our last question will be from Will Hamilton with Pershing.

Thank you.

I was just wondering real quick whether, given your cash flow strength, whether you have any chance or plans to pay down some of the debt you have.

It's principally fixed-term debt but some of it's maturing.

Mike, do you have a little insight into the schedule that you might share?

This year, we will probably pay down something in the neighborhood 700 of 800 million.

Of that, roughly 500 million of it is floating-rate debt that we will settle out this year; the rest of the debt is termed out with payments scheduled out in '06, '08, 2010, so on.

So 500 million-plus is the minimum this year.

It's pretty low-rate stuff.

I don't know of anybody in a big hurry to pay that down.

Okay, we would like to thank all of you for being on the call today.

There is a replay that will begin at 2 PM and the number is 888-203-1112.

The passcode is 440094.

I will be available to answer questions as soon as I can grab a bite to eat.

My number is 703-876-3195.

And good morning!

That will conclude today's conference call.

Thank you for your participation.

You may now disconnect.